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IR35 proposals leave low-paid vulnerable

LITRG voices concerns about extension of off-payroll rules

The Low Incomes Tax Reform Group (LITRG), which is an initiative of the Chartered Institute of Taxation, has expressed its concern that the Government’s determination to extend the ‘off-payroll’ rules to the private sector in April 2020 will have a severe impact on lower paid workers.

Whilst the LITRG welcomed the exemption from the rules for small businesses, thereby relieving them of the huge administrative burden of applying the legislation, it warned that some low-paid workers contracted to medium and large businesses may be forced to abandon their limited companies. This could then leave them with lingering messy compliance issues for years to come as these workers often have little understanding of how a limited company operates and struggle to separate their own affairs from that of their company’s. As such, there is a strong likelihood that their limited company may not be closed down correctly.

Victoria Todd, Head of LITRG Team, says about the potential mass exodus from personal service companies;

“If businesses do respond by forcing the abandonment of limited companies, it could happen on a large scale with many workers affected. The Government will need to be prepared and will need to consider their response very carefully.”

Many low-paid temporary workers who obtain work via agencies and other employment businesses, only form their own company out of compulsion because that is the only way they can secure such work. This, of course, is driven by the engager’s desire to save on paying employers’ NIC and avoid having to offer the worker employment rights and privileges. As well, there is often the opportunity for the employment business to earn additional income by providing the worker with accountancy services.

The new rules now seriously threaten the use of limited companies by low-paid workers, causing Victoria Todd to comment,

“If the intermediary concludes that the new rules effectively neutralise the tax advantages of these arrangements, it is likely that workers will be pulled out of limited companies. If what we saw after public sector changes is anything to go by, they could then find themselves encouraged into other dubious arrangements that help engagers protect their profitability.”

On a positive note, the LITRG did welcome HMRC’s commitment that they will not use the changes to carry out historical IR35 enquiries. Hopefully, the department will be true to their word but I wouldn’t wholly trust them given the current antics and attitude of those officers involved in employment status!

By Qdos Contractor

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9 thoughts on “IR35 proposals leave low-paid vulnerable”

  1. David C

    HMRC would find it hard to use the changes to carry out historical IR35 enquiries…as there will be so many and most will be blanket decisions anyway

  2. DJH

    I see the problem of this perception being driven by the Ltd Co vehicle being abused by big employers like BBC and Railway Companies that force employees to become independent PSC ‘resources’ to save themselves the Employers NI. It was wrongly sold to such workers as a tax dodge where everyone wins.
    The HMRC look at the whole industry and assume everyone providing services via a PSC must therefore be in the same boat and a ‘aggressive tax avoider’ (which still is not evasion and not illegal).

  3. CX

    This seems a rather weak argument by this group, to be honest.

    If these people can’t understand a Ltd Co, but are running one… then perhaps it’s difficult to argue against anything that gets them out of that trap.

    The issue is, as the article says, whether this will mean that companies will shut down the Ltd Co route. If there are really people out there who don’t understand it then… it seems a good idea to shut it down (for them)?

    From an end-client perspective, if those people run around behaving like employees because they have no incentive to do otherwise, when they don’t foot the bill, you do, then you’d want to shut that down?

    And… artificial employment (which it must be if the worker doesn’t understand their status) isn’t that one of the main issues IR35 was supposed to address?

    In the meantime, it seems important to ensure that those who do understand a Ltd Co and wish to work as independent consultants are able to find work on those terms.

    • Soprano

      What the article is alluding to is tax avoidance schemes, of the kind which are now proliferating in the public sector and especially the NHS. It’s not a weak argument because it s precisely what is unfolding as firms unfairly blanket assess workers as “inside”, whilst offering no commensurate employment rights or benefits – because the legislation does not provide for it.

      “And… artificial employment (which it must be if the worker doesn’t understand their status) isn’t that one of the main issues IR35 was supposed to address?”

      It’s not necessarily artificial on that basis. Not unless all the three relevant status tests are failed. However, with the off-payroll reforms the responsibility for determining that moves to the fee payer, and many fee payers have been unlawfully blanket assessing contractors as “inside”. They aren’t necessarily inside – it’s just that many public sector clients were encouraged to do this, including by officials via webinars.

      Also, IR35 has strayed far from its supposed original purpose – the Fri-Monday contractor, whereby some engagers made their employees into contractors. This was more prevalent in the public sector – and even by the revenue’s own admission, most contractors are applying the rules correctly (and their court track record doesn’t really do much to suggest otherwise.) The proposed changes to the private sector and the public sector off pay roll reforms are, however, an utter shambles.

      I’d recommend consulting this: https://www.contractorcalculator.co.uk/docs/IR35Campaign/20181111-ContractorCalculator-IR35-Private-Sector-Factsheet.pdf

  4. CX

    Soprano – I think you’re missing the key point here. What was being said in this article is that (heavily paraphrased):

    1. People will be forced to abandon Ltd Cos
    2. They were forced into them in the first place
    3. That they don’t understand the Ltd co

    When it says ” …as these workers often have little understanding of how a limited company operates and struggle to separate their own affairs from that of their company’s”.

    It then goes on to state some vague concerns that they will instead be forced down some other (but unspecified) route.

    This is not a valid concern. Apart from the obvious, which is the fact that they would be no worse off (and no better off) – just in a different (rather dodgy) place…

    It seems that all other non-legitimate routes have already been closed off. If not, then they will do that as and when the abuse becomes apparent.

    Sorry, but this is a non-argument against IR35 in the private sector. If there are such abuses going on and the IR35 roll-out shuts them down them that’s right and proper. if instead they shift elsewhere, that’s not right and it’s certainly not a reason to leave Offence A alone because of vague fears that there just might be an Offence B instead.

  5. CX

    Sorry, I should just add that I am very much against IR35. But as long as it’s rolled out as it was n the public sector, where it’s not the worker that gets the tax hit, then it could and should solve many of the problems and be about the best deal the contracting community is likely to get.

    That’s IF they prevent the blanket determinations issue whereby all contracts are offered as Inside IR35. To my min that should be the focus now – ensuring that agencies behave properly in this.

    To that end, I hope all contractors will turn down Inside IR35 work unless it pays roughly double the market rate for the same work Outside IR35.

    Of course, they won’t – there will always be some – but I can hope 🙂

  6. CX

    With the DUP about to pull their confidecne and supply arrangement – it seems that the Budget will never make it to a Finance Bill anyway.

    So – no IR35 in the private sector (at least for now).

    I’m not sure I should be happy about that though – having the fee-payer responsible for the tax/NI is a better place than where we are now (as long as they don’t blanket Inside IR35 contracts).

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